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Advantages And Risks Of Single Tenant Properties

 

Advantages And Risks Of Single Tenant Properties

Around 25% to 35% of the value of commercial properties are single-tenant properties (STPs).  This large percentage means that institutional investors such as pension funds, as well as smaller investment groups must consider this type of investment. There are many uses ranging from office to industrial to retail. They can include office buildings, warehouses, department stores, supermarkets and other retail use. There are advantages and disadvantages in this type of ownership compared to multi-tenant properties.

Types of Single Tenant Properties

  • Corporate sale-leasebacks. Most of the STP properties are corporate properties that have been sold to third parties and simultaneously leased back by the corporate seller, often for a long term. The usual reason for the seller was to raise additional cash.
  • Build-to-suit. Build-to-suit (BTS) generally refers to office, industrial, or warehouse facilities constructed for a single user and designed specifically for its particular needs. In an over-supplied market, BTS eliminates the rent-up risk for developers. The completed building is either held by the developer or is sold to a third party who simultaneously enters into a long-term lease with the user.
  • Existing STPs. The third form includes multi-tenant buildings that ultimately are occupied by a single tenant that expands space plus the two preceding types that are leased to third parties after the original user vacates. Since all in this group are “second generation” tenants, buildings in this category are often older than other STPs.

Convertibility To Other Use

The major consideration to an investor is whether the building can be converted to related uses at a low cost. This rules out special use properties such as refineries or manufacturing facilities. It may also rule out some corporate headquarters or institutional office buildings, constructed to meet business objectives of the original user. Often these were built without regard to capital outlays or ease of maintenance.

Warehouse and distribution facilities might be easily subdivided provided that the original design did not include a central access. They can be obsolete quickly if transportation patterns change.

Retail properties may require considerable alteration to create suitable individual stores. Service and customer access must be available for each unit. Parking may not be adequate with a larger number of tenants.

Advantages

The major advantage of the STP is the absence of any short-term re-leasing risk plus a known cash flow for the term of a long lease. Another consideration is the minimal management requirement on the investor since the properties are usually leased under net leases.

Risks

The obvious risk is when a tenant does not renew the lease or the business fails. The vacancy rate immediately jumps to 100%. Time to find a new tenant or to renovate the property can be very costly.

A STP may not be any riskier than a multi-tenant building, providing the lease is long and the tenant is a high quality company. Risks can be minimized by requiring tenants to have high credit ratings and by providing in the lease that rental payments must continue under all circumstances except possible destruction or condemnation of the building (in which case, insurance proceeds or the condemnation award should reimburse the owner’s capital investment.)

A STP that fits all of the qualifications for a good investment can be a worthwhile acquisition for the institutional or individual investor.